Building contract – Repudiation – Adjudication – Claimants challenging adjudicator’s decision in favour of defendant – Claimants obtaining judgment in default of defence – Whether court having jurisdiction to set aside judgment – Whether appropriate case for imposing conditions – Application granted
The defendant was a building contractor employed by the claimant council under a written contract to carry out refurbishment works. An adjudication clause stated that each party would pay its own adjudication costs. Issues arose concerning variations and delays.
By a default notice, the claimants alleged that the defendant was in default of its contractual obligation to proceed regularly and diligently with the works and purported to determine its employment under the contract. The defendant disputed that determination and an adjudicator appointed to resolve the dispute concluded that the defendant had not repudiated the contract. The defendant sought to enforce the notice and the court gave judgment in its favour: see [2008] EWHC 1836 (TCC); [2008] 3 EGLR 1; [2008] 44 EG 116.
The claimants were dissatisfied with the adjudicator’s decision. They were concerned that the defendant was winding down its trading activities and that its latest accounts showed a poor trading and asset position. They feared that it would take advantage of “winning” the liability issue before the adjudicator and initiate a further adjudication to recover a substantial sum of money that was possibly due to it following that decision. Any money decision in favour of the defendant would result in that sum being used to satisfy the defendant’s debts; were it to be ultimately found that the claimants had terminated the defendant’s contractual employment lawfully, the defendant would owe the claimants a net sum that would never be repaid.
Therefore, the claimants sought to establish that they had lawfully terminated the defendant’s employment under the contract and to recover the net sum of more than £1m that was said broadly to be due to them as a consequence of that termination. Judgment in default of defence was entered against the defendant, but the latter applied to set it aside on the ground that it had a good arguable defence. The claimants, whilst accepting that there was a properly arguable defence, contended that, given the defendant’s financial position, conditions should be imposed whereby it should be prevented from pursuing adjudication against the claimants and should be required to provide security for costs of pursuing its counter-claim.
Held: The application was granted.
The court could have regard to a range of circumstances in deciding whether to exercise its discretion to set aside and if so on what terms, if any, including the delay or promptness with which the application to set aside was issued and the reasons why the defence had not been served in time. The court undoubtedly had the jurisdiction to impose conditions as part of setting aside the default judgment, but that jurisdiction was tempered by the requirement that the court was not to impose conditions to punish the defendant and had to have regard to the imperative to act justly as between the parties.
In the instant case, the available evidence overall clearly indicated that the defendant was insolvent, in the sense that it could not pay its debts as they fell due, and there was no obvious prospect of it being able to repay any sum that might be awarded against it under a future adjudication decision. However, the court should exercise its discretion to set aside the judgment because although there was no other good reason to do so, the defendant had a real prospect of successfully defending the claim since the first adjudicator had decided on a relatively reasoned basis that the claimants had repudiated the contract.
The court clearly had jurisdiction under the CPR to impose conditions on the setting aside of a judgment in default. In considering whether to impose conditions and in the management of cases, the court had to have regard to the overriding objective of the CPR to deal with cases justly. That included, so far as was practicable, ensuring that the parties were on an equal footing, saving expense, dealing with the case in ways that were proportionate, ensuring that it was dealt with expeditiously and fairly and allotting to it an appropriate share of the court’s resources, while taking into account resources to other cases: see CPR 1.1(2).
On balance, the court would not impose any condition that prevented or limited the defendant from pursuing a further adjudication. The failure to serve a defence within the permitted time, without securing an extension of time, had been an oversight on the part of the defendant or its solicitor. It was thus purely fortuitous that the claimants were able to enter judgment in default.
It would be an exceptional course for the court on setting aside a judgment to prevent a party from pursuing a statutory right to adjudicate at any time. This was not an exceptional case. Parliament had altered the commercial balance as between employers and contractors by passing the Arbitration Act 1996. That had given parties the lever of adjudication. The threat to adjudicate might encourage settlement; an actual adjudication decision might induce a final settlement. If the defendant or those financing it wanted to risk proceeding to adjudication, they would bear in mind the potential advantages in so doing and the risk that a court might stay a judgment to enforce any adjudication decision in the defendant’s favour by reason of insolvency and inability to repay. The court should generally not interfere in the commercial relationship between the parties.
Furthermore, it would be inappropriate to impose, at least at this stage, any condition so far as security for costs was concerned because the imposition of a security would in effect involve punishing the defendant. The court might make an order for security from costs in favour of the claimants in respect of the counter-claim brought against them if the counter-claim that raised issues which went beyond the defence of its claim: Thistle Hotels Ltd (formerly Thistle Hotels plc) v Gamma Four Ltd [2004] EWHC 322 (Ch) considered.
David Matthias QC (instructed by the legal department of Camden London Borough Council) appeared for the claimants; Karim Ghaly (instructed by Fenwick Elliott LLP) appeared for the defendant.
Eileen O’Grady, barrister